Stream Media Corporation / 4772 COVERAGE INITIATED ON: 2021.07.20 LAST UPDATE: 2021.08.11 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. Stream Media Corporation/ 4772 RCoverage LAST UPDATE: 2021.08.11 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 7 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 13 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 13 Business Model --------------------------------------------------------------------------------------------------------------------------------------- 15 Rights & Media segment (75.8% of total revenue in FY12/20) ---------------------------------------------------------------------------------- 15 Entertainment segment (24.2% of total revenue in FY12/20) ------------------------------------------------------------------------------------ 19 Other (0.0% of revenue in FY12/20) ---------------------------------------------------------------------------------------------------------------------- 23 Parent company strategy ------------------------------------------------------------------------------------------------------------------------- 24 SM Entertainment ----------------------------------------------------------------------------------------------------------------------------------------------- 24 Market and value chain---------------------------------------------------------------------------------------------------------------------------- 28 Korean government policy to promote content and market expansion ---------------------------------------------------------------------- 28 Main competitors ----------------------------------------------------------------------------------------------------------------------------------------------- 34 Reference companies: Korean entertainment companies ------------------------------------------------------------------------------------------ 35 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 37 Historical performance and financial statements ------------------------------------------------------------------------------------------ 39 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 39 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 40 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 41 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 43 Other information ---------------------------------------------------------------------------------------------------------------------------------- 49 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 49 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 49 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 49 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 50 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 50 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 50 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 50 02/51 Stream Media Corporation/ 4772 RCoverage LAST UPDATE: 2021.08.11 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Executive summary Business overview ◤ Stream Media Corporation (SMC) is a Japanese subsidiary of SM Entertainment (SM), South Korea’s largest entertainment company. Since 1998, SMC has provided digital content centered on Korean TV shows (K-dramas) in Japan. In 2009, SMC merged with BOF International Inc., a subsidiary of South Korea-based KEYEAST Co., Ltd. (founded by Bae Yong-joon, the lead actor of the K-drama hit “Winter Sonata”). At the time, SMC operated Japanese fan clubs for Korean actors/actresses, and broadcast Korean pop culture content through its paid TV channel DATV to communication satellite (CS) broadcasting subscribers. ◤ In 2016, SM invested in SMC through its Japanese subsidiary SM Entertainment Japan Co., Ltd. In 2018, SM acquired KEYEAST, bringing SMC into its group as a result. SMC then acquired SMEJ Inc. (a newly formed subsidiary of SM Entertainment Japan Co., Ltd.) via an absorption-type merger. Following the merger, SMC continued to broadcast paid content and manage and operate Japanese fan clubs for Korean artists, including artists not affiliated with SM, while also operating the music business (master production and CD sales) and concert business inherited from SMEJ. SM holds 85.3% of the voting rights in SMC. The company operates in three segments: Rights & Media (in FY12/20, 75.8% of total revenue; operating loss of JPY195mn), Entertainment (24.2% of total revenue; operating loss of JPY308mn), and Other (0.0%; operating loss of JPY14mn). ◤ In the Rights & Media segment, SMC broadcasts paid TV channels such as KNTV through CS broadcasting (via direct broadcast satellite services such as SKY PerfecTV! and SKY PerfecTV! Premium Service), cable TV (CATV), and Internet Protocol TV (IPTV). In FY12/19, broadcasting revenue was JPY2.3bn (36.1% of total revenue). Broadcasting revenue was not specifically disclosed in FY12/20 but assuming this revenue held steady YoY, broadcasting likely made up half of the total revenue of JPY4.3bn in FY12/20. Broadcasting revenue is determined by the number of subscribers and subscription fees. SMC pays a fixed percentage (undisclosed) of its subscription revenue to CS broadcasters. It had roughly 100,000 subscribers (as of 2014), mainly consisting of Korean pop culture fans in their 40s and above, including Korean residents in Japan. A KNTV subscription costs JPY3,960/month (on SKY PerfecTV!; incl. tax). In the rights business, SMC sells broadcasting rights of TV shows it has purchased in South Korea to terrestrial, CS, and other broadcasters. It also supplies DVDs of such TV shows to DVD rental chains. The company sells broadcast rights with a limited term and it also collects a portion of the revenue generated from the secondary usage for some rights it sells. However, the copyright of the TV shows is not transferred and remains with the Korean production company or TV station. SMC has not disclosed the fees from selling broadcasting rights. ◤ In the Entertainment segment, SMC exclusively manages SM-affiliated artists in Japan, organizes concerts for them at sports stadiums and other venues, sells merchandise, and plans and operates media appearances. For Korean artists who are not affiliated with SM, the company also offers contracted support for fan club operation, mobile